What Is Q5Y?
What is Q5Y?
The Quant: 5Y (Q5Y) is a proprietary metric created by The Motley Fool that's used to rate a stock’s ability to outperform the market over five years. Premium members can find it for every stock on their watchlist with the “Track My Stocks” option on the dashboard homepage. In addition, it’s updated daily in the Rec Screener Tool.
Q5Y is not only proprietary, but it also uses data generated only by The Motley Fool and its members. Therefore, it’s impossible to replicate anywhere else.
The factors within the model have been tested to demonstrate outperformance and potency; based on historical analysis, applying the factors tends to generate stocks that outperform the market. A higher factor means more outperformance, and a lower factor indicates a less favorable outcome.
Ultimately, Q5Y is intended to identify stocks that could outperform by separating skill from luck in the selection process and then conveying a level of conviction in the stock to investors.
How does it work?
What is the process behind the Q5Y?
Four factors are currently assessed (more details on them to follow). Each is turned into a specific ranking score ranging from 40 to 100. The four scores are averaged to produce a single Q5Y score. Each score incorporates an element of stock-picking skill, so every factor goes through a process of eliminating luck.
The four factors are:
- Recency score
- Services score
- Analyst score
- CAPS score
Recency and services scores
Recency and services scores
The Motley Fool offers various stock-picking services, and the recency score tracks the number of days since a stock was recommended across its services. This applies across all its services and has been tested to demonstrate outperformance and potency; newer picks tend to outperform more than older picks.
In addition to newer picks, the number of services in conjunction with the estimated stock-picking skill of those services has proven over time to demonstrate a positive relationship with returns. According to the models, if a stock tends to receive more recommendations from higher-skilled Motley Fool services, it tends to produce better performance than the market. These two elements -- the number of services and the estimated stock-picking skill of these services -- are combined to create the services score.
Analyst score and CAPS score
Analyst score and CAPS score
The Motley Fool has an internal research analyst team. As part of their jobs, these people create modeled and assessed portfolios. A combination of the number of analysts recommending a stock in their internal portfolios and the stock-picking skill of the analysts has demonstrated an ability to generate market-beating stocks over time. It’s important to note that the data garnered here doesn’t necessarily correlate with services skill, since not all the analysts’ stock picks in their internal portfolios become core recommendations.
The Motley Fool community at large also contributes to the Q5Y score through data garnered from the CAPS community. The higher-rated stock picks of top-ranked CAPS players have demonstrated outperformance over time. Therefore, the CAPS score incorporates stock picks from higher-rated active CAPS players.
Using the Q5Y
Using the Q5Y
Although all methodologically created models are subject to the creation of unintended style or sector biases and there’s no substitute for doing your own research, the Q5Y serves as a valuable tool for initiating research into stocks or even as a stock-picking filter.
For example, you could use the Q5Y to help create a diversified portfolio by finding the best stocks in a sector or to whittle down a list of potential stocks by filtering out those with a low Q5Y score.
